KATHMANDU, Aug 14: Nepal Rastra Bank (NRB), the banking sector regulator, has given final approval for the merger of troubled Vibor Bikas Bank with Bhajuratna Finance and Savings Company.
The impending merger is expected to greatly benefit Vibor, as the category ´B´ financial institution, which nearly went bankrupt due to problems in the real estate sector, is still struggling to stay afloat.
Once the merger is complete, the paid-up capital of the consolidated unit is expected to stand at Rs 900.45 million.
Vibor currently has a capital of Rs 681.83 million. Lately, the development bank has also received a cash injection of Rs 140 million from Jyoti Group.
This amount was received from investment made by the Group in Vibor´s Share Option Deposit - a deposit scheme that allows subscribers to convert deposit into shares of the bank at Rs 100 per share upon maturity. Bhajuratna, a category ´C´ financial institution, meanwhile, has a paid-up capital of Rs 78.62 million.
“We are planning to further raise the bank´s capital base and consolidate its position by resorting to merger with other institutions,” Ajay Ghimire, CEO of Vibor, who will continue to head the bank after merger, told Republica, informing that retrenchments will not be made once consolidation is complete.
Vibor, led by highflying Ghimire, a graduate from MIT Sloan School of Management, was one of the country´s promising development banks until three years ago.
At that time, the real estate sector was booming and taking advantage of the central bank´s provision that allowed category ´B´ financial institutions to directly finance real estate projects, the bank had decided to build apartment complexes in Pulchowk and Kamalpokhari to further maximize profits.
For the purpose, it accumulated over Rs 470 million by introducing series of schemes dubbed Vibor Super Yield Deposit, under which depositors were promised interest yields coupled with 40 percent profit from investment made in projects.
At the same time, the bank also launched Vibor Super Share Deposit scheme, under which depositors were allowed to convert their fixed deposits into shares upon maturity. This scheme, which generated Rs 830 million, was expected to boost the bank´s capital base.
As things were looking up for Vibor, Nepal Rastra Bank, in December 2009, came up with a directive that made it mandatory for financial institutions to gradually bring down their lending to the real estate sector to 25 percent of the total credit portfolio.
The directive, on one hand, stagnated real estate prices, and on the other brought down share prices. This meant trouble for Vibor as it had significant exposure to the real estate sector.
As problematic signs started surfacing in the bank, depositors started withdrawing money, depleting reserve created to build apartment complexes. This dealt a double whammy as the bank lost its depositors and money to build complexes.
Soon the share deposit scheme also failed to draw customers as its share prices had already started taking a beating.
In the end, it had no option but to resort to the central bank. It then took a loan of Rs 188.6 million under the refinance borrowing facility from Nepal Rastra Bank. Later, it also took a credit of Rs 500 million from the central bank under the last resort borrowing facility.
Lately, however, things are again looking up for the development bank as it has already cleared all the debts it owed to the central bank. Latest NRB report shows the bank has also cleared debts of Rs 340 million it owed to banks and financial institutions in mid-April to mid-May period.
“The upcoming merger will definitely help the bank consolidate its position in the market to some extent as Bhajuratna has piled up significant amount of deposits despite being a small institution,” an NRB official said on condition of anonymity.